Multiple Choice: 1. c. 9. d. 17. a. 2. d. 10. c. 18. d. 3. c. 11. c. 19. d. 4. b. 12. c. 20. b. 5. d. 13. d. 21. a. 6. c. 14. a. 22. c. 7. d. 15. d. 23. c 8. d. 16. a. 24. b. Problems: 1. Barter is the direct exchange of goods. The problem with barter as a means of exchange is that to make a trade by barter requires a double coincidence of wants. You must find someone who has what you want and who wants what you have. 2. The three functions of money are: (1) Medium of exchange (2) Measure of value (3) Store of value 3. U.S. government securities are an attractive asset for a bank to hold because: (1) U.S. government securities pay interest (2) U.S. government securities are low risk (3) U.S. government securities are highly liquid 4. a. Required reserves = $7,200,000 b. Excess reserves = $200,000 c. Amount to loan out = $54,600 5. The effects of inflation: (1) Inflation decreases the buying power of people who hold money. (2) Inflation reduces the real interest rate earned on savings. (3) Increasing inflation benefits borrowers and hurts lenders. (4) Inflation increases uncertainty and can thus discourage investment. Answers to Think Like an Economist: 1. The price level would rise. The demand for cigarettes to smoke is less elastic than the demand for other commodities (smokers would continue to smoke about the same amount as before the increase in the standard of living), so the supply of cigarettes would decrease more slowly than the supply of other commodities, and the price level would rise. 2. The prices of luxuries would rise. The increase in the standard of living would increase the demand for luxuries more than the demand for necessities, causing the prices of luxuries to rise. 3. The prices of necessities would fall. The increase in the standard of living would increase the demand for necessities less than the demand for luxuries, causing the prices of necessities to fall. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Money, Money Creation, and Inflation 10 - 18